Why Hewlett Packard Enterprise Is Slimming Down On Software

After months of rumors, Hewlett Packard Enterprise confirmed on Wednesday that it would spin off its software business to U.K. software maker Micro Focus.

Under the terms of the $8.8 billion deal, HPE shareholders would own 50.1% of the new company and HPE would get a $2.5 billion cash payment. It also plans to take a $700 million charge.

The deal will make HPE “an even stronger company, well positioned to the future,” said HPE CEO Meg Whitman during a call with analysts.

Just a little over a year ago, Hewlett-Packard, the venerable but fading tech giant, had annual sales over $100 billion. In November, it split into two separate companies, however, creating two $50 billion businesses— one focused on data center technology (HPE (HPE)) and the other on PCs and printers (HP, Inc. (HPQ)).

After spinning off its software business, one of the spawn, HPE, will have its annual sales dwindle to nearly $28 billion. The deal is expected to close in the second half of 2017.

For Whitman, the deal is just another step in HPE’s seemingly endless quest to shrink itself and, in her words, become a “more nimble” company. The rise of cloud computing providers like Amazon (AMZN) and Microsoft (MSFT) that sell computing and storage resources to businesses on-demand has put increased pressure on enterprise companies like HPE and Cisco (CSCO), which get the bulk of their revenue from selling data center hardware.

Whitman reiterated that the only way to stay competitive in today’s rapidly changing marketplace is to cut back on size and narrowly focus on a few specialties rather than be a giant, one-stop-shop corporation.

When asked by UBS managing director Steve Milunovich how a smaller HPE planned to compete with the much larger companies Dell and Cisco, Whitman acknowledged, “We are getting smaller while they are getting bigger.”

She believes that HPE will be less saddled by the debt required by companies like Dell to finance mega-deals and that HPE would have more cash available to give back to shareholders.

“I think it’s difficult to be leveraged as much as Dell is in this environment,” Whitman said.

About Cisco, she described it as a “good competitor” but also pointed out that it lacked a popular data center storage product. She argued that the market for data center gear could pick up as companies increasingly outfit their branch offices and factory floors with mini-data centers for analyzing information on site, and that HPE would benefit.

She also bragged about the potential of HPE’s newly released data center gear that combines networking, storage, and computing as an advantage for HPE. But other vendors like Cisco sell similar equipment.

Whitman defended the idea of spinning off HPE’s software business, in which the mechanics of the deal seem similar to when HPE in May spun off its IT services business group and merged it with IT company Computer Sciences.

Instead of merely selling a slowing business and raking in some quick cash, Whitman argued that new Micro Focus would be able to nurture the software business in ways HPE could not. As a result, HPE shareholders would benefit from a rising share price.

And while HPE appears to be ridding itself of business software, Whitman maintained that software is still important to the company’s strategy. She explained that HPE wants to focus on cutting-edge software that helps businesses run their corporate infrastructure as opposed to the more traditional business software that Micro Focus sells and just got a lot more of.

As proof of HPE’s commitment to data center software, Whitman pointed to the company’s recent partnerships with General Electric’s (GE) digital business and hot startups like Docker and Mesosphere. A new lineup of HPE servers will come bundled with Docker’s software for developers and IT operators, she added, that will presumably make them more attractive to buyers.

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Whitman also played up HPE’s role in helping data storage startup Dropbox move most of its corporate infrastructure from Amazon’s cloud computing service into its own data centers.